ECON - 110 Flashcards
CH. 2
Model 1 : Circular - Flow Diagram
two actors - households, firms
two markets- for goods & services , for “factors of production”
Households - own factors of production and sell to firms for income
Firms - buy/hire the factors of production and use it to make stuff to tell back to you
Factors of production
- the resources the economy uses to produce goods and services
- Labor : people
- Land : raw materials/natural resources
- Capital : buildings & machines used in production/ tools & tech
- Entrepreneurship - idea
Model 2 : Production Possibilities Frontier (PPF)
- If we have this much stuff what can we make with it
Stuff = tech, natural resources ect.
4 Points of PFF & Opportunity Cost
Opp. Cost - what you give up to obtain something, not just money, could something like time
Moving PPF - shift of resources
Society faces trade off - SACRIFICE, if want more of one have to give up some of another
Slope - rise over run
PPF shapes
Straight line : Opp. cost is constant , resources to make A are just as good to make B
Bow : increasing Opp. cost, resources are specialized & not easily adaptable, if you want more of A then the amount of B sacrificed will increase
Economic Growth
- additional resources/ improvement in tech = EG
- improvement in tech ALWAYS shift PPF OUTWARD
- EG -> more jobs -> business growing -> PPF shift OUTWARD
MICRO vs. MACRO
Micro- study of people
Macro - study of economy phenonea like inflation & unemployment
Positive statement Vs. Normative statement
Positive - A FACT
Normative - AN OPINION
Absolute Advantage
- Adam Smith -> father of AA
- produce a good using fewer inputs then another
- also if A and B have the same resources but A still makes more then A has A.A.
- A.A. is found by looking for the highest number
Comparative Advantage
- David Ricardo -> father of C.A.
- is related to Opp. cost
- you aren’t #1/ the best but better then most
- produce a good with lower opportunity cost then another producer
Opportunity cost
- whatever is given up to obtain some item
- measures trade off between the two goods that each producer faces
principle of comparative advantage
- each good - produced by the individual has a small Opp. cost of producing that good
Rules
- can have A.A. in both
- Cannot hae C.A. in both
Price of trade
- aka terms of trade
- always between two opp. cost given.
Math lesson
visual notes taken
- denominator is what you are trying to find the opp cost of
- top is the other number
- must calculate for every tiem of every country so if you have 2 counties with 2 items there will be four equations
Demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
shift in demand
Market demand + individual
Supply curve shifters : # of sellers
increase in # of sellers then increase the QUANTity supplied at each price
Surplus
- QUANTity supplied greater than QUANTity demand
Equilibrium
when QUANTity supplied = QUANTity demanded
Supply QUANTity (QS)
- the QS of any good is the amount that sellers are willing & able to sell at a specific price
-QS is a point on the supply curve.
Normal good
- is positively related to income
inferior good
negatively related to income
Demand curve shifters: Prices of related goods
- Complements: 2 good are “complements” if an increase in price of 1 causes a fall in demand for the other
Quantity Demand (QD)
- the QD of any food is the amount of the good BUYERS are willing + able to PURCHASE at a specific price
- QD is a point on the demand curve
Supply and demand rule #1
If s & d are shifting in the SAME direction then QUANTITY changes but the price is unknown
Supply and demand rule #2
If s & d are shifting in the OPPOSITE direction then PRICE changes and quantity is unknown
Equilibrium
- if above equ. line then its surplus
- if below the equ. line then its shortage
Elasticity of demand
- Equation - % change in Qd / % change in P
- measures the price - sensitivity of buyers ( you)
- remember Quantity is on top of fraction , Price is on the bottom of the reaction
HOW to calculate the % change
End value - start value / start value =? then ? x 100 = answers
WHY do we use the midpoint method ( elasticity )
-It doesn’t matter what value you start with and it doesn’t matter what value you end with you will always get the same elasticity
- end value - start value / midpoint = ? then ? x 100
How to get the midpoint number
P1+P2 = ? then ?/2 = Midpoint
RULES OF DEMAND CURVE /ELASTICITY
- elasticity is the ratio of the two percentages - NOTE : NOT RISE OVER RUN OR SLOPE, but elasticity and slope are related
- the FLATTER the curve , the BIGGER the elasticity
- the STEEPER the curve, the SMALLER the elasticity
- There are 5 different classifications of D curve
What is cost
- its the value of everything a SELLER must give up to produce a good
Producer Surplus : Equation + def.
- Producer Surplus (PS) = Price (P) - Cost
- is the amount a seller is paid for a good minus the sellers cost
Consumer Surplus : Equation + def.
- CS = WTP - P
- is the amount a buyer is willing to pay minus the amount the buyer actually pays
What is total surplus
- total surplus is the CS combine with the PS
- TS = CS + PS
- total gains from trade in a market
